Hedging Against Falling Lean Hogs Prices using Lean Hogs Futures

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Lean Hogs Futures and Commodities

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Lean hog futures are critical hedging instruments for the pork industry and because of the volatility of hog prices. Trading in these futures often attract plenty of speculative positions. The lean hog is another term for pork that is traded on the options and futures exchanges of the Chicago Mercantile Exchange (CME).

Contract Specs

Some important characteristics of the lean hog futures contract are as follows:

  • Ticker Symbol: LH
  • Exchange: CME
  • Trading Hours: 10:05 a.m. to 2:00 PM EST
  • Contract Size: 40,000 pounds
  • Contract Months: Feb, Apr, May, Jun, Jul, Aug, Oct, and Dec.
  • Price Quote: price per pound
  • Tick Size: $0.00025 or 2.5 cents per pound = $10.00 (0.00025 x 40,000 lbs).
  • Last Trading Day: The tenth business day of the contract month

Fundamentals

Most hog production occurs in the Midwest. The largest hog producing states are Iowa, North Carolina, Minnesota, and Illinois. The U.S. is the world’s largest pork exporter. Typically, it takes six months to raise a pig from birth to slaughter. Hogs are generally ready for market or slaughter when they reach a weight near 250 pounds.

A market hog with a live weight of 250 pounds will typically yield 88.6 pounds of lean meat (Pork Facts 2001). This lean meat consists of an average of 21% ham, 20.3% loin, 13.9% belly, 3% spareribs, 7.3% Boston butt roast and blade steaks, and 10.3% picnic. The rest goes into jowl, lean trim, fat, and miscellaneous cuts and trimmings (USDA-AMS).

Pork bellies, which used to trade on the CME, are mainly used for bacon and can be frozen and stored for up to a year before processing. The contract was discontinued due to a lack of liquidity.

Seasonality tends to lead hog prices higher between May and July the heart of grilling season in the United States.

Corn and Hogs

The price of corn has a strong correlation with lean hog futures because hogs eat corn. If the price of corn rises substantially, farmers tend to take their hogs to market at lower weights (younger) to avoid high feed costs. At these times, lean hog futures prices tend to drop due to increased supplies.

One can estimate the future amount of hog production by monitoring the Hogs and Pigs Report. When the number of newborn pigs is lower than in previous quarters, it is likely that hog production will be lower in six months later when they are ready for market.

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Reports

The Hogs and Pigs Report comes out quarterly. The hogs report presents data on the U.S. pig crop including inventory numbers and weights. The data highlights the current supplies and projected supplies for the future. The CME Lean Hog Index is a two-day weighted average of cash prices.

Developments Over Recent Years

Pork is a staple animal protein around the world. Over recent years, the hog futures market has experienced a great deal of price volatility.

In 2020, lean hog futures rose to all-time highs at over $1.33 per pound when porcine epidemic diarrhea or PED caused the death of over seven million suckling pigs, creating a pork shortage and caused the price of the animal protein to skyrocket. An effective immunization has prevented further outbreaks of PED. In 2020, the price of lean hog futures moved back to the 60 cents per pound level.

In 2020, the Chinese bought the largest U.S. hog processing company Smithfield Foods. While there was some opposition, the sale of the company was eventually approved by Congress, and now China controls an integral part of the U.S. and international pork market.

With over 1.3 billion people to feed, the purchase of Smithfield Foods is another example of China’s appetite for commodity resources around the globe. Pork is a vital animal protein and a staple in the diets of many people.

The world population has increased exponentially, and competition for food will continue to strain the fundamentals of lean hogs and other foods when supply shortages appear. Demographics are likely to cause new highs in many food markets during periods of tight supplies.

Lean Hogs Futures – Price & Chart

Current and historical prices, chart and data for the CME Lean Hogs Futures #1 (LN1) contract. Contracts use the following methodology to allow long term price comparisons:

  • Front Month
  • Calendar-Weighted Adjusted Prices
  • Roll on First of Month
  • Continuous Contract History
Lean Hogs Futures – Historical Annual Data
Year Average
Settle Price
Year Open Year High Year Low Year Settle Annual
% Change
2020 63.9747 71.5500 71.5500 48.3250 48.3250 -32.34%
2020 72.1556 61.7000 98.9750 52.9750 71.4250 17.14%
2020 66.1188 70.7250 83.7250 48.4000 60.9750 -15.05%
2020 69.9594 63.5000 87.0250 55.7000 71.7750 8.50%
2020 66.3531 59.4250 88.0750 41.1000 66.1500 10.62%
2020 69.5256 81.3000 85.0500 51.8000 59.8000 -26.35%
2020 105.5361 87.0750 132.7900 80.2500 81.2000 -4.95%
2020 89.0450 86.1750 100.9500 77.8750 85.4250 -0.35%
2020 84.6836 85.5250 95.6000 71.3500 85.7250 1.69%
2020 90.2337 77.9750 103.8500 77.3000 84.3000 5.71%
2020 75.9315 65.8500 87.0750 65.2000 79.7500 21.57%
2009 59.7443 63.8500 74.2750 43.9750 65.6000 7.76%
2008 66.5499 57.1700 79.7250 54.0000 60.8750 5.19%
2007 66.6581 59.5000 77.8500 51.1200 57.8700 -6.21%
2006 64.2102 64.6500 76.9200 57.2000 61.7000 -5.47%
2005 68.5450 76.7000 80.8000 58.1500 65.2700 -14.57%
2004 69.2127 55.4200 78.1200 51.7700 76.4000 43.02%
2003 56.9180 51.8200 68.4500 48.7000 53.4200 3.53%
2002 48.9731 56.5700 62.7200 30.0500 51.6000 -9.55%
2001 60.9637 57.1700 73.1700 47.5700 57.0500 0.40%
2000 61.0319 55.9700 77.4700 50.7500 56.8200 4.26%
1999 48.6393 30.7200 60.7000 30.7200 54.5000 66.92%
1998 48.4267 57.5200 62.8000 27.9500 32.6500 -43.41%
1997 73.0166 78.7000 85.4500 57.7000 57.7000 -27.16%
1996 56.5259 47.0700 79.5000 44.8040 79.2200 63.10%
1995 43.8374 39.2500 50.7200 37.1000 48.5700 23.43%
1994 43.3690 45.2200 53.2200 31.6500 39.3500 -13.23%
1993 47.8947 43.6500 56.0200 42.4500 45.3500 3.97%
1992 43.1364 38.9700 48.9500 38.7500 43.6200 10.99%
1991 49.2020 48.0700 58.9200 39.1200 39.3000 -19.58%
1990 54.4233 48.7200 67.0000 46.5500 48.8700 0.35%
1989 45.3110 46.1500 51.1200 38.7500 48.7000 4.69%
1988 44.8668 41.9700 54.7300 37.5500 46.5200 13.27%
1987 48.8574 47.7200 59.2700 40.6500 41.0700 -13.08%
1986 49.5046 46.3000 60.1600 38.0700 47.2500 1.35%
1985 46.0524 53.7500 53.7500 34.8000 46.6200 -12.57%
1984 51.0063 50.3000 57.7500 44.2500 53.3200 4.04%
1983 47.7878 57.3500 59.7000 40.2000 51.2500 -9.69%
1982 56.3194 43.8200 64.7500 43.8200 56.7500 30.91%
1981 48.3873 47.0700 56.8500 38.8200 43.3500 -9.21%
1980 42.2413 43.1700 57.3700 32.0500 47.7500 14.59%
1979 43.2873 49.7200 54.1200 31.4200 41.6700 -15.13%
1978 48.9482 43.3200 56.0500 42.7000 49.1000 13.34%
1977 39.8940 37.5000 47.7000 33.8500 43.3200 15.15%
1976 42.3979 47.8200 53.2700 29.8200 37.6200 -22.38%
1975 49.7545 42.4700 65.0500 36.9700 48.4700 15.68%
1974 38.1620 45.8000 48.1000 24.0200 41.9000 -5.42%
1973 41.5048 33.0200 57.0500 30.0700 44.3000 36.10%
1972 28.0347 25.1000 32.9700 23.4000 32.5500 29.68%
1971 20.2612 16.4200 25.1000 16.0500 25.1000 53.52%
1970 23.1992 27.9500 28.4500 16.1500 16.3500 -40.00%
Latest Futures Contract Prices as of 2020-04-03
Futures Contract Name Settle Volume Open Interest
(Previous Day)
S&P 500 2,482.7500 1,703,883 3,502,138
EURO STOXX 50 2,633.0000 1,001,352 4,625,984
Crude Oil 28.3400 983,892 634,727
10 Year Treasury 139.1406 889,439 3,266,404
5 Year Treasury 125.4141 547,066 3,765,674
NASDAQ 100 7,522.7500 346,328 188,791
2 Year Treasury 110.2063 306,843 2,708,511
Eurodollar 99.4850 259,774 1,625,477
30 Year Treasury 182.5625 181,415 1,003,139
Dow Jones 20,957.0000 169,298 55,110
Natural Gas 1.6210 155,164 354,873
Corn 330.7500 147,431 435,662
Euro FX 1.0834 134,457 540,136
Gold 1,645.7000 132,126 359,745
DAX 9,506.0000 88,350 105,788
Japanese Yen 9,254.5000 81,190 121,560
British Pound 1.2282 71,865 160,702
30 Day Fed Funds 99.9250 68,769 247,014
Australian Dollar 0.6002 63,872 127,204
Soybeans 854.2500 62,075 247,927
EURO-BTP 141.3100 61,465 332,815
Canadian Dollar 0.7071 60,064 108,930
Mexican Peso 39,850.0000 50,828 99,761
Heating Oil 1.0706 50,157 98,497
Soybean Oil 26.4300 49,486 139,445
Gasoline 0.6916 47,969 115,106
Copper 2.1925 45,861 86,554
Soybean Meal 303.2000 42,629 123,814
CBOT Wheat 549.2500 39,986 131,975
Cattle 80.8500 38,724 123,684
Silver 14.4940 37,460 77,779
Swiss Franc 1.0272 21,586 29,495
S&P/TSX 60 794.8000 17,794 298,333
CME Wheat 472.0000 17,698 91,057
New Zealand Dollar 0.5858 14,977 39,548
Coffee 114.9000 14,636 60,554
Lean Hogs 48.3250 14,453 78,977
Cotton 50.9800 13,726 72,356
Cocoa 2,264.0000 12,447 54,692
US Dollar 100.6770 10,324 28,402
S&P 400 Midcap 1,330.2000 8,344 82,130
Platinum 718.1000 7,278 49,333
Nikkei 225 17,865.0000 3,935 11,718
CME S&P 500 Index 2,482.7000 1,095 79,625
Rice 14.5500 828 6,366
Palladium 2,106.0000 667 6,642
Oats 272.7500 515 2,146
Milk 12.1800 513 3,307
Lumber 264.0000 146 1,366

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Lean Hog Futures

Each year, 100 million hogs are brought to slaughter, a number only possible because of the movement to intensive, rather than traditional, pig farming. Because pork is one of the most widely consumed meats, the demand for pork is always strong and growing. Lean hog is the most common source for pork meat in the U.S., but the country that continuously ranks at the top for total consumption of pork is, without a doubt, China.

Lean Hog Futures Contract Specifications
Contract Size 40,000 pounds (˜18 metric tons)
Price Quotation Cents per pound
Trading Hours Monday 9:05 a.m. Central Time/CT-Opening. At 4:00 p.m. CT on Monday- Thursday, the markets halt and restart at 8:00 a.m. CT on the next morning. Friday 1:55 p.m. CT-Close
Minimum Price Fluctuation $.00025 per pound ($10 per contract)
Product Code CME Globex: HE
CME ClearPort: LN
Clearing: LN
TAS: HET
Listed Contracts February (G), April (J), May (K), June (M), July (N), August (Q), October (V) & December (Z)
Settlement Method Financially Settled
Last Trade Date 10th business day of the contract month, 12:00 p.m.
Trade At Marker Or Trade At Settlement Rules Trading at settlement is available for first 2 listed futures contract months, a calendar spread between the first and second contract month, and are subject to the existing TAS rules. The Last Trade Date for CME Livestock TAS products will be the second to last business day in the month prior to the named contract month.

Trading in all CME Livestock TAS products will be 9:05-13:00 Chicago time on Mondays or on the Tuesdays that follow a Monday holiday, and Tuesday through Friday 8:00-13:00, Chicago time.

TAS products will trade a total of four ticks above and below the settlement price in ticks of the corresponding futures contract (0.00025), off of a “Base Price” of 0 to create a differential (plus or minus 4 ticks) versus settlement in the underlying product on a 1 to 1 basis. A trade done at the Base Price of 0 will correspond to a “traditional” TAS trade which will clear exactly at the final settlement price of the day.

Note: No May contract or calendar spread with the May expiration as a leg will have TAS in Lean Hog futures.

Settlement Procedures Lean Hog Futures Settlement Procedures
Exchange Rules These contracts are listed with, and subject to, the rules and regulations of CME.
Source: CME Group

Lean Hog Facts

Hogs have a relatively short gestation period of about 3.5 months with the typical litter bearing 9 piglets. Therefore, hogs are bred twice a year continuously in order to ensure a constant wave of production. After about a month, the piglets are weaned from their mothers and fed a special diet to produce a quick weight gain. Hogs can gain up to 3 pounds every time they feed. When hogs are around 6 months old and reach a weight of over 250 pounds they are ready to be butchered. Each matured hog can yield around 190 lbs. of meat suitable for consumption.

China is responsible for nearly half of all pork production worldwide, however, the United States is the leader for pork exports. Japan was the world’s largest importer of pork in 2020.

Lean hog futures can allow traders to address price risk among those involved in the trade of lean hogs and to assess supply and demand of lean hogs for both the current and future outlook.

Last updated October 2020

Additional Info

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